Opening up CfDs ‘could save £2 billion’

Opening up future contracts for difference (CfD) to a wider array of technologies and reforming the auction process to better reflect their true costs, could save consumers around £2 billion, according to research commissioned by Drax.

The report, by NERA Economic Consulting and Imperial College London, said the whole system cost for offshore wind, including paying for back up generation via the capacity auction, is £127/MWh. By comparison onshore wind costs £92-97/MWh, solar costs £96/MWh and biomass conversion just £84/MWh. None of these established technologies will be able to take part in the next auction, although they may be included in future ones.

Allowing them to bid in all three of the auctions expected to take place before 2020 and reforming the auction to reflect whole system costs, could lead to savings of £1.9 billion to £2.2 billion over the entirety of the 15-year contracts, researchers said.

The report examined two possible ways of reflecting the whole system costs of technologies in CfD auctions: either allowing projects to bid for both CfDs and capacity market contracts at the same time or enabling the auction administrator to prioritise projects with the lowest whole system costs.

Drax Group chief executive Dorothy Thompson said: “This independent research shows it’s crucial we get the right mix of energy generation. The UK’s system faces growing challenges, from costs to reliability as traditional forms of generation are replaced with renewables.

“Intermittent renewables like wind and solar are vital as we continue to clean up energy generation, but they need to be backed up by a constant supply of electricity that can be flexed up and down to make sure the UK’s businesses and households always have power on demand.”

Drax has converted two of six units to run on biomass at its otherwise coal-fired power station in Yorkshire. It is also looking to convert a third unit which is currently burning 85 per cent biomass. Whether or not that happens will depend on the outcome of an EU State Aid probe into the £100/MWh strike price offered to Drax for the unit.   

Chief executive of Drax Power Andy Koss said recently that coal-fired generation may be needed beyond 2025, despite the government’s pledge to phase it out by then.

Although a date hasn’t been set for the next CfD auction it is due to take place at some point in 2016. Only less established technologies will be eligible to bid for contracts, with offshore wind expected to be the main recipient of subsidies.